The Disadvantages of Merging Companies

Martin Barraud/OJO Images/GettyImages

Merging two companies can provide the firms with synergies and economies of scale that can lead to greater efficiency and profitability, but it is important to note that mergers can have a downside too. It may be harder for the combined organization to cooperate and communicate, and there's a risk that companies with a too-large market share will eliminate the competition and raise prices for consumers.

Clash of Cultures

When two firms merge, it is more than a coming together of two names or brands – it is a real merger of people who bring along a specific corporate culture. If two firms have very different corporate cultures, conflicts can arise. For example, if an innovative, entrepreneurial company with a flat hierarchy were to merge with a highly hierarchical, conservative and traditional organization, the employees in the new organization would be likely to have difficulties working together.

Diseconomies of Scale

When businesses merge, it is often to achieve economies of scale. Larger organizations are typically able to produce goods and services more efficiently and at a lower per-unit cost than smaller businesses because fixed costs are spread out over a larger number of units. This is not always the case, however. Sometimes when two firms merge, being larger will actually create dis-economies of scale, where per unit production costs increase because of increased coordination costs.

Consumer Perceptions

When two companies merge, they need to consider how consumers view the two firms and whether or not they view them in a compatible way. For example, if an environmentally friendly soap company were to merge with an industrial detergent manufacturer with a poor environmental track record, it may alienate the customers of the environmentally friendly soap company who don't want to support a company that is not environmentally responsible.

The Layoffs Dilemma

Merging two businesses is often a good method for reducing the labor force of the two organizations. For instance, a company may combine its two offices into one and reduce the number of staff performing the same duties. While this can provide cost savings for the company, it can also have a negative effect on employees. Employees may become fearful of losing their job and may lose their trust in the organization. This can decrease employee motivation and reduce productivity.

Higher Consumer Prices

Price competition reflects competition in most cases. Monopolies are one big potential issue with company mergers. Even without monopoly creation within an industry, less competition often leads to increased pricing to consumers. While some increases reflect the increased costs involved in dis-economies, the ultimate result yields dissatisfaction to the buyers of goods and services. Business mergers often have to balance increased pricing with potential layoffs to prevent high consumer costs.

References

About the Author

Wendel Clark began writing in 2006, with work published in academic journals such as "Babel" and "The Podium." He has worked in the field of management and is completing his master's degree in strategic management.